India's growth slowdown expected to be temporary-Moody's Global Macroeconomic Update (2018-19)

India is the only G20 emerging market country where growth has slowed sharply for six consecutive quarters. We expect economic growth in 2017 to average 6.2% before accelerating to around 7.5% in 2018 and 2019. We attribute some of the deceleration in growth to three factors: 1) the temporary negative impact of last year's demonetization on the economy; 2) temporary disruption related to the rollout of the Goods and Service Tax (GST); and 3) weak bank lending for investment-related activity due to a high proportion of delinquent loans on bank balance sheets. The effects of demonetization and GST implementation will fade.

The government's capital infusion plan announced on October 24 is positive for economic growth because it will help break the negative loop of weak lending, weak investment, weak growth and weak balance sheets. Despite progress on economic reforms and monetary policy easing, the flow of bank credit for investment activities has been hampered by both the inability of the banking sector to lend and weak demand for credit. The Indian government has announced a Rs. 2.1 trillion ($32 billion, or around 2% of GDP) recapitalization plan for state-controlled banks (around 70% of the sector), in order to strengthen banks' balance sheets and jump-start investment. The recapitalization is expected to be accompanied by a series of banking sector reforms, although details are yet unknown. In addition, the government announced a Rs. 6.9 trillion ($106 billion) infrastructure package for roads and national highways over five years, with an aim to boost investment and employment. We believe that the reforms, including liberalization of foreign direct investment in key sectors and the GST, will increase efficiency, boosting trend growth. Resolving stressed corporate and bank balance sheets through bankruptcy, resolution and recapitalization would be an important step toward restarting the investment cycle and unlocking the benefits of the reforms. This amount of capital injection would allow banks to meet international standards of capital adequacy and, over time, grow lending.

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